Download slides only - Post Keynesian Study Group

A Kaleckian Approach to
Innovation and Investment
Policy in the context of
Sustainable Development
Jerry Courvisanos
Centre for Regional Innovation and
Competitiveness and the School of Business
Kalecki Seminar
Robinson College, Cambridge
1 March 2011
Human knowledge and human power
meet in one; for where the cause is not
known the effect cannot be produced.
Nature to be commanded must be
obeyed; and that which in contemplation
is as the cause is in operation as the rule.
Francis Bacon (1620), Novum Organum (Book I, Aphorism
III), The Works of Francis Bacon, Volume IV, New York,
Elibron Classics, 2000, p. 47
Kaleckian Approach:
A Political Economy Perspective
• Kurt Rothschild (1989) in ‘Political
economy or economics?’ identifies Kalecki
classic article ‘Political Aspects of Full
Employment’ (1943) as a classic example
of political economy (PE)
• By writing ‘Political Aspects of Innovation’,
nailing my mast to PE
Definition I: Political Economy
Adam Smith: production, buying &
selling, and their relations with law,
custom & government, impact on
distribution of income and wealth – first
clear link between capital accumulation
and technical ‘progress’ via innovation
For this talk: The above, in the context
of the institutions of power related to the
conduct of innovation and its
implementation via investment as
reflected by cycles and crises.
Political Economy: A Critical
Realist Perspective
• Rejection of atomistic individual perspective
• Alternative perspective is ‘critical realism’ (CR)
- where the real social world is an open
system of social structures and agents, not a
closed system of atoms
• Causation not found in event regularity
• Found in underlying causal mechanisms
inherent in structures and powers which have
tendencies that may or not be evident in
observable data – real dimension
(e.g. stars observed in the sky)
Critical Realist view of Causation
(Source: Sayer, 2000, p. 15)
Definition II: Innovation
• Application of knowledge by enterprise in a
new form to increase the set of techniques (or
processes) & products commercially available
in the region or economy specified (new only
to firm: imitation which is crucial for diffusion
of innovation)
• Technological or organisational (human
resource, including networks, learning) cooperative mode
• Forms of innovation can dovetail into higher
order innovation, becoming increasingly
more important to society
Forms of Innovation
• Continuous incremental (or ‘Kaizen’)
• Radical discontinuous based on research
and development (R&D)
• Technological systems change based on
a cluster of innovations
• Techno-economic paradigm shift due to
major structural change (e.g. the steam
engine, information technology)
(Freeman and Perez, 1988)
Innovation Dynamics
• Traverse: Tracing out a structural change
human agency path of affirmative innovation
specified and employed in a policy-planning
framework (private and/or public)
• Observed traverse: Sequence of short-term
irreversible events within the structure of
production that evolves into structural change
• Transformative innovation: Innovation as
spur to alter significantly current general
purpose technologies (GPTs) path
• Evasive innovation: Innovation that supports
& enhances current GPTs path, even if the
innovation is radical, e.g. (i) hybrid cars,
(ii) carbon capture electricity
Definition III: Investment
• Tangible investment - by enterprise in capital
accumulation
• Intangible investment - in codified and tacit
knowledge, e.g. R&D, design, in-house
training, experimental time, organisational
architecture, networks
• Public investment in knowledge-based
infrastructure and support for building
innovation capacity, e.g. education and
training, internet access, technology parks
and incubators, protection
and incentives
Definition III: Investment
• Total investment – all three add up to form
aggregate investment cycles
• Investment (Juglar) cycles ‘to a considerable
extent’ is the proximate cause of business
cycles (empirical dimension)
• Instability is the outcome: booms and busts.
• Long boom encouraged much incremental
innovation, lower investment effectiveness
from about 2004 (once the boom was under
way), feeds boom with financial instability
growing towards “Ponzi”
Proportion of Investment in the
World GDP, 1965-2005
Source: Korotayev and Tsirel (2010, p. 42)
World Investment Effectiveness
1965-2005
Source: Korotayev and Tsirel (2010, p. 42)
World GDP Annual Growth Rates
1871-2007 (5-year averages)
Source: Korotayev and Tsirel (2010, p. 43)
Definition IV: Kaleckian
• Michał Kalecki? Polish autodidact -
‘[i]n my view, Kalecki
has a strong claim to be regarded as the greatest all-round economist of the
twentieth century.’ (Harcourt, 2006, p. 163)
• Kaleckian? Based on Marx-Keynes-Kalecki model
• PAFE: political economy of full employment policy
• Innovation context: profit levels as generating the
ability (equity & debt) to invest in capital goods
and in innovation knowledge enhancement at
macroeconomic level (complements meso-EE)
• Investment decision (I) for profits expected –
allows extension of innovation
(shortterm)
Kaleckian investment & innovation
I = f (animal spirits/degree of confidence)
= F (profits, change in profits, gearing ratio,
capacity utilisation) assuming no technical
progress
• Income distribution struggle + effective demand
• Capital accumulation is embedded in the
endogenous (or induced) innovation generated
from within the organisations (via R&D
expenditure and knowledge spillovers)
• Kalecki calls innovation the most significant
‘development effect’ (long-term)
Kaleckian Theory of Investment
Three endogenous variables:
- profits and the mark-up
- financial constraints/gearing (increasing risk)
- excess capacity and accumulation
Institutional (convention-based) elements to be
considered within context specific nation/region:
- competition between firms
- role of agents in the firm
- financial behaviour of firms
- role of innovation
- role of the state
Investment Framework
• From Kaleckian perspective, causes of
investment is the essential dynamic of
business cycles and trend growth
• Three aspects to this investment
dynamic:
– Time lag in ex ante decision (orders) and
in ex post implementation (expenditure)
– Feedback loop from profits to investment
– Instability from exposure to risk and
fundamental uncertainty
Kaleckian Innovation
• Innovations prevent system from settling to a
static position, engenders long-run upward trend
if rate is above depreciation level
• Amplitude of investment cycles creates the longterm trends (interconnected)
• Two reasons for cumulative cyclical growth
– Increased productivity out of process
innovation
– New level of demand from product innovation
Definition V: Evolutionary
• EE - Economic development as an evolutionary
process in which innovation working at the
micro-level (as technology, knowledge,
entrepreneurship)…Schumpeter inspired
• Path-dependent trajectory that evolves
(changes) over time due to dynamic mesoeconomic forces of competition (at novelty
level, less on price) at industry/sectoral
levels…Richard Nelson inspired
• Has a vast research literature on innovation
• CR: ‘meso’ real dimension of behaviour
• Link via CR to Kaleckian approach
Evolutionary and Kaleckian Themes Compared
Evolutionary
Kaleckian
Bounded rationality
Cumulative causation (learning, spillovers)
Disequilibrium/historical time dynamics
Endogenous technological change via novelty
Mesoeconomic source
Macroeconomic source
Long-term patterns of development
Chain of short-term decisions to long-term
path
Heterogeneity agents’ technical capabilities
Representative firm behaviour
Limit to growth: supply-side (productivity)
Limit to growth: demand-side (C, I, G, X-M)
Differences in competitiveness, rate of
productivity change as a result of
technological progress (supply-side)
Changes in sectoral shares of demand impact
on the rate of growth (demand-side)
Knightian uncertainty - ‘potential
surprises’
Keynesian uncertainty - ‘animal spirits’
Innovation to productivity
Investment ‘adopts’ innovation
Total investment is in the institutional
background (innovation system)
Tangible investment principal route for
innovation
Innovation-Investment Framework
Evolutionary-Kaleckian approach
Dynamic circular flow link b/w innovation () and investment (I)
Innovation: Schumpeter & Kalecki
• Schumpeter (1939) - clustering of innovation
• Rothbarth (1942) - need ‘adaptation mechanism’
that enables clustering to become investment
bunching: the innovation impulse
• Kalecki provides this mechanism through profit
link to investment (in capital stock)
• Both S & K identify explicitly the innovation factor
that determines the new investment’s ability to
capture profit increments
• In K, this process is set in historical time
Innovation: Schumpeter Vs Kalecki
• S: supply-side long-run approach, driven by the
entrepreneur (1912) or R&D (1942)
• K: demand-side short-run approach where
effective demand determines the speed and
strength of innovation diffusion
– at micro level, based on the ability of firms to
invest in innovation out of profits
• R: Uncertainty created by innovation process
leads to strong dependence of physical
investment (equity or debt) on current profits
Cycles & Crises: Causal Mechanisms
• Bhaduri (1986) ‘systematic contradictory pulls"
between pt and p in real time
• Non-linear feedback mechanisms from p to I
• In expansion phase investment orders build up
leads to increase in susceptibility (tension) for an
investment downturn, even though pt strong
• Because p starts to decline towards top of
expansion – capacity & gearing build up (fragile)
• RD continues its endogenous innovation push
• Monopoly control of innovation systems by
conservative entrepreneur-managers intensifies
susceptibility – encourages evasive
innovation
Political Aspects of Innovation
• Apply the PAFE approach to innovation [PAI]
• With contractionary political trend in force,
capitalist need for public stimulation of private
investment through technological innovation
• Shift economic public policy from direct public
investment to stimulate employment; to indirect
via innovation policies (replace protection)
• Propose to identify three fears with innovation in
a boom that result in public innovation policies
to sustain evasive innovation, delaying renewal
• In contraction, support mounts for
significant new innovation initiatives
Three Fears with Innovation
• Loss of economic control: for incumbents by
threat on new entrants - leads to public
innovation policies to support incumbents (with
IPR and R&D subsidies) that limit innovation
• Loss of policy control: as public support of
national innovation system becomes distributed
broadly - leads to neo-liberalism via
privatisation, public-private partnerships, public
contracting
• Loss of industrial control: with FE-based
industrial relations - need ‘flexibility’ with
technical change to cut labour costs
PAI Cycle Framework
• PAI framework tracks innovation over the
period of a business cycle
• Identifies role government policy plays in
innovation in the context of the cycle
• Top of expansion - evasive innovation
reinforces prior innovation with relatively
lower investment – public support policies
• Contraction: little innovation despite much
patenting and R&D activity – public
stimulatory package
Implications of PAI
• PBC-political trend has led public economic
policy to be limited to pro-business strategy: tax
cuts, armaments, R&D, entrepreneurship
support
• All aimed to support private accumulation
process directly
• Empirical evidence on the success of this probusiness strategy is mixed, with lower working
conditions, significant monopoly power and
much downsizing/outsourcing to small business
• Much rent-seeking behaviour in the
cyclical PAI process, constraining
transformative innovation
Current GPTs Technology Path
Current GPTs Technology Path:
Peak Oil
Definition VI: Sustainable Development
• ‘Bruntland Report’ (1987) - economic
development which ‘…meets the needs of the
present without compromising the ability of
future generations to meet their own needs”
• Vercelli (1998) specifies a viable policy definition
- economic development can be ‘…considered
sustainable only when future generations are
guaranteed a set of options at least as wide as
that possessed by the current generation’…
• Strong sustainability definition
Sustainable Development :
Challenge and Opportunities
- strategy required by the state to counter PAI
Examples of PAI preventing
Sustainable Development
• Collapse of Copenhagen Summit 2009
- inability to agree on implementing greenhouse
gas pricing of ‘free good’ (Courvisanos et al., 2009)
• Slow take up of renewable energy in both
stationary and transport sectors (see film “Who
Killed the Electric Car?”, current PhD study on Barriers to
Australian Stationary Renewable Energy)
• Current large project team studying the New
Zealand and Australian Dairy industries, control
by Fonterra preventing transformative SD
options from small farmers & producers
Sustainable Development Framework
-
1.
2.
3.
4.
four elements of innovation policy
Agreed ecological sustainable rules (or
conventions)…precautionary principle
Perspective planning – flexible, local-based
democratic motivation and local voluntary
conformity towards regional ecologically
appropriate goals…social learning
Cumulative effective demand with strong local
niche market share for environmental-based
goods & services…stimulus support
Investment and finance planning
underpinning above
Sustainable Development
Investment Planning Criteria
• Investment planning and infrastructure
underpinning an innovation strategy
• Resource-saving on new capital stock –
low real depreciation and high
utilisation of productive capacity
• Iterative planning with “bottom-up”
regional monitoring and evaluation
(based in social learning)
Sustainable Development
Implementation Strategy
Instrumental Analysis (Adolph Lowe)
Begin with pre-analytic economia vision:
• elicit public motivation and conformity at
local level through regional networks
• working backwards to develop an
investment framework
• incorporating an innovation policy along a
ecologically sustainable path
Sustainable Development
Implementation Strategy
Need for Perspective Planning (Kaleckian)
• Iterative planning with bounded rationality
• Procedural (or designing) rationality in the
context of the “precautionary principle” –
reject optimal rationality approach
• Goal of sustainable development: strong
sustainability - guarantee future generations at least a
set of options as wide as current
generation possesses
Bensalem
The Sixth Wave: How to
succeed in a resource-limited
world
“Bold, timely and inspiring …
this book could change your
thinking about innovation and
the future” – Dr Geoff Garrett,
CSIRO Chief Executive
“Moody, from CSIRO, and science writer
Nogrady assert that this latest wave will be
about natural resources, human resources
and information. Responding to the
challenges of sustainability and rapid
population growth, humanity will finally break
away from resource dependence.” – What’s
New in Book Reviews, Boss Magazine
(Financial Review).
Thank you for listening
Questions and comments please